Web 2.0 has re-energized the entrepreneurial community. (Whatever Web 2.0 means.) Stories are coming in of competition for deals and a surge in A round valuations. Here is a flavor. A couple of Stanford sophomores got $5M on $8M pre-money. A deal turned down by one name partner got picked up by another at a leading fund. One of the hot deals from DemoMobile claims to have three term sheets, ranging from $7-10M on $12-15M pre-money. The list goes on. What gives? Have the VCs once again lost their good sense? And so soon after the last bubble?
To give perspective, a normal Series A - the first round of institutional money - is $4M on $4M pre-money. With product launch and customers, this can be stepped up a bit, to $6-8M pre. Web 2.0 makes it easier to build and launch a web service, and the size and fluidity of the web makes it easier to gain initial customer traction. Indeed, if you read about how to do Web 2.0 businesses, if you cannot build, launch and gain traction cheaply, you aren't a Web 2.0 venture!
What Web 2.0 giveth, it also taketh away. It is just as easy for your competition to do the same. Some 300 social networks were formed and funded by someone; yet only one achieved sustainable scale (MySpace), and only one or two others seem to be giving chase (Facebook, Hi5). Does first mover advantage work? Friendster was the first mover in social networks; MySpace a late entrant. Is there a competitive or marketing approach which seems to work? Perhaps 'seeding' a web service works, and then letting viral word-of-mouth drive growth; but if that is all there was, Friendster should have won. In summary, the rules for success in Web 2.0 are stil being worked out, and given the ease of building a web service, this could become even more brutal than the PC days, with 47 disk drive ventures and 50-odd workstation companies.
So why the froth? First, supply. Around half of the Silicon Valley
venture funds have reloaded. The first two quarters were relatively
quiet, but now they are jumping in, intensifying a competition for
deals. Second, demand. Inspiring the new gold rush were a series of
recent exits at higher-then-expected values: Skype of course at $2.6B;
MySpace and IGN from News Corp both over $500M; and others. Third,
Google. It has been buying up small ventures, and its success has
caused the other players to reshuffle the chessboard. Fourth, capital efficiency. Web 2.0 deals do not need that much to gain traction, paradoxically putting even more pressure on the VCs to put their money to work. Finally, timing. Tech booms happen every ten years or so, when the technology has sufficiently advanced to create order-of-magnitude improvements.
We are now entering the Double Bubble of the Internet. This froth is to be expected. Look for the pace to quicken. And for more reports on the Web 2.0 Bubble.